Net Worth Update October 2015 – Karl the Real Estate Agent (+4.94%)

Welcome to the Million Dollar Journey December 2014 Net Worth Update – Team MDJ edition. A select group of readers were selected to be part of Team MDJ which was conceived after the million dollar net worth milestone was achieved in June 2014. Karl the Real Estate Agent was selected as a team member and will post net worth updates on a regular basis. Here is more about Karl.

Notes: Almost all of net worth is in the real estate market (principal residence and rentals).

It has been a great quarter for me and my wife professionally which has enabled us to advance towards our goals. In this quarter, we managed to pay off the remaining balance of our last car loan . This means we own 2 vehicles in good shape and paid off in full. Our plan is to keep the cars for another five years.

I also have been putting away lump sums from each cheque with the plan of paying off the principal residence mortgage when the mortgage is due in May 2016. Refinancing my rental property will also contribute to paying of the principal mortgage, but for me mentally it is going to be a giant win regardless. We will continue to double up payments on both our principal and rental mortgage. I can honestly say that being part of this group has given me the push to chase my financial dreams. I’m forever indebted to MDJ for the opportunity

For what it’s worth, the biggest thing I have learned so far is that everyone has different goals and opinions (which at first took me by surprise how vocal people are in the comments section. lol). But if you don’t have an emotional attachment to your goal you won’t pursue it. I received a lot of heat for wanting to pay off my principle mortgage before going gangbusters into saving and investing. But that’s what I want and as soon as I accepted that, it made this a lot easier for me. Everyday I think about how I’m going to feel when I wake up for the first time and my home is completely paid and right now it’s my main financial goal.

Notable Changes Since the Last Update:

Paid Off Audi ($13,000);

Increased Savings;

Doubled up mortgage payments;

We have a couple development properties tied up pending due diligence; and,

Still haven’t set up wife TFSA.

Before the next update, I need to setup my wife’s TFSA and max mine out with the new increase.

My spouse and I currently live in our fourth personal residence since entering the real estate market in 2006. We used to move around town when I was able to find a decent deal to buy. That has all changed now with two kids (4&6), so now my real estate investing is done outside our principle residence. I currently own one rental semi-detached 3 bedroom in my personal name.

In terms of savings, I’m automatically making bi-weekly deposits into my TFSA to max out the year but I still have plenty of room left. However, my wife’s account hasn’t been fully funded over the years. I’m looking forward to learning more about investing in securities and transitioning away from rentals as they are extremely labor intensive investments that take a lot of time away from my family.

The biggest financial challenges that we face are a lack of budgeting and a lot of discretionary spending. Having the majority of our household income being commission based and somewhat seasonal has been a battle since day one.

The Cash

Any cash I have in my chequing account is currently used to pay monthly bills and living expenses. All paycheques are deposited into our chequing account and is our primary household account that everything runs through so the cash amount fluctuates.

The large cash amount sitting in my business account is what I have from liquidating my rental and land and will be used to finance the next piece of land I am looking at. If I haven’t found anything by May 2016, I will put it on my principle residence and setup so I can access it as a LOC.

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About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

I put all my money towards my mortgage, beyond maxing out my RRSP. I didn’t take vacations for a few years and kept all other expenses super low. I paid off my mortgage in about 4 years and now have shifting much of that money towards savings / investing.

From a purely numbers point of view, I’m sure putting all that money into the market would have been better off. But I sleep better at night with my house paid off and have ZERO regrets.

Do what works for you. Other people might have different goals and different ideas and I find it’s important to try and learn why those ideas would or would not work for you, but otherwise follow your course. You seem to be doing well.

“Do what works for you.” I think this comment hits the nail on the head. Basically, we read websites like MDJ to gather information. Everyone’s situation is unique, and there likely really is no true correct way to invest your money. The key is, when you are armed with more knowledge, then you’ll be more confident with your decisions.

So, I want to know more about how did you manage to obtain a line of credit on your rental property, which bank is it with, did they know it was a rental when you applied for it, what are the terms? aka P+0.5? I own a few rentals my self and have learnt that no bank will give you reovlving lines of credit on a rental, looks like you got it and I want to learn how… thanks!

I personally use the CIBC home power plan. As the mortgage pays down a line of credit is built up in that same amount. It works really well when you use the LOC as a down payment to buy more rentals as the LOC stays tax deductible, you can also convert this LOC to a mortgage. Just make sure to run tight income to costs ratios before buying a property as you are now running a 100% mortgage basically.

I have 65% equity HELOCs on all my rentals at prime with TD. Last purchase I made was structured as 20% cash, 65% HELOC and 15% mortgage.
I managed to get the rate to prime by approaching CIBC and requesting prime to transfer my entire portfolio (ten properties approx. value mid seven figures). They agreed (plus pay for all transfer fees) and I asked for a formal written offer. I emailed my TD manager the offer and gave him the opportunity to match the terms. He agreed immediately. The key though is to have a written, not just verbal, offer from another bank. That’s your bargaining chip.
I have an excellent working relationship with my bank now because they know I will leave in a nano second if I don’t get the best terms available.

I have it through Scotia and they are well aware its a rental. You have to hold 20% as a conventional mortgage but anything above that you can get as a scotialine. Can’t remember the rate but yes it is possible.

I don’t know how refinancing the rental property to pay down the house mortgage makes sense. The tax write off on the interest is a big thing and this would eliminate it. Maybe the interest rate is low enough and the mortgage ammortization short enough that you won’t be paying much in interest anyways, so not much of a loss?

Question for the readership – if Karl bought some lots to flip or develop to sell, could he write off interest on loans used to buy them? It seems like a catch 22 as if he wants to write off the interest, the profit from the development would have to be income, not capital gains. Since interest can only be written off on investments that can earn or might earn income. Buying a lot to flip would never earn income.

If you spend money to buy an investment (that you later sell as a capital gain), and spend money to improve on that investment (obviously for the purpose of improving your capital gain), then those amounts can be added to your overall cost base.

Example: Say you buy a property for $100 000, but there are lawyer’s fees ($1000), realtor’s fees ($5000) and renovations that clearly improve the property (like changing a carpet to hardwood flooring ($5000)). Notice this gives a total of $111 000. This is your cost base (basically purchase price + capital expenses)

Now let’s say, down the road, you sell the property for $170 000. Your capital gain is $170 000 – $111 000 = $59 000. Your tax bill will be based on this $59 000 of capital gain, in the year the property was sold.

Now going with your question on interest. You are correct in noticing that interest is generally written off every year as a current expense, and on something that gives you income. The Canada Revenue Agency (CRA) even states something to this effect on their website. But you are also correct in noticing that your property example appears more like a capital gain. This definitely seems like a grey area. I’m inclined to think this:
If you want to “write off” the interest, then you are kind of admitting your capital gain is more like income (and taxed at a much higher rate!)
If you don’t want to run that risk, then best not to claim any of the interest.

However, if you or anyone plan on doing this, I’d recommend to talk to CRA or an accountant to see if you can keep track of all the years you paid interest, and see if that can be added to your overall cost base, and therefore lower your overall capital gain.

Hope this gives you insight, but I don’t think I fully answered your question! Anyone else care to comment ;)

Hi there, I’m wondering from a personal finance tracking point of view – would it not make sense to have a separate account for commissions to come in (to pay capital expenditures or big purchases) and one account for where the salary comes in (to pay monthly fixed costs). And I suppose a credit card for business/sales expenses and another for personal expenses to flow through. I’m in a similar situation with my wife being a salaried employee and me a commissioned sales agent… And we are trying to figure out the best way to setup/track to our finances. Any suggestions would be greatly appreciated, we are really pulling our hair out on this one – being married just over a year, lol :) Thanks in advance!